US labor market review: the good, the bad, and the ugly

In light of the ugly NFP data last Friday, we present a more comprehensive US labor market review below. The overall message is that the US labor market is slowing to a crawl, but we are not yet seeing recessionary feedback loops. 

• The Good: Levels and breadth of layoffs still limited
• The Bad: Coincident and leading data point to continued weakness
• The Ugly: Manufacturing and residential construction job losses gaining pace

From here, the key downside risk to the US labor market is tariffs hurting corporate profit margins, which could lead to broader layoffs. However, the burden of proof is on evidence of further worsening. See our August Macro Snapshot for the broader macro context.

The Good: Levels and breadth of layoffs still limited

Jobless claims and layoff announcements are critical to follow because they are evidence of outright job losses rather than slowing payrolls growth. So far, these are holding up and aren't pointing to the start of the regime shift where job losses lead to lower sales/production and further job losses.

In level terms, both initial and continuing claims have edged higher but remain near pre-pandemic norms.

The breadth of both initial and continuing claims are still below recessionary thresholds and the levels seen in the 2023 recession scare.

The lack of broad-based job losses means that typical labor market recession signals like the Sahm Rule are also well below trigger thresholds.

The Bad: Coincident and leading data point to continued weakness

Despite the lack of layoffs, most other coincident data on the labor market show job growth has stalled. Notably, payroll taxes withheld by the US Treasury fell again in July vs the same month last year.

Meanwhile, the ISM non-manufacturing PMI (released today) and regional Fed surveys both point to slowing growth in service sector employment, the largest payroll sector.

Labor market leading indicators still point to continued weakness. Most important, the profit outlook has weakened, which historically leads to weaker employment.

On top of this, small business and consumer survey data (which are admittedly noisy) still imply unemployment is biased higher.

The Ugly: Manufacturing and construction job losses gaining pace

Job losses in manufacturing, and increasingly construction, are the most concerning aspect of the labor market. Although manufacturing and construction are a small share of total payrolls, these cyclical sectors turn first and make up a relatively large share of job losses during recessions.

The employment components of the latest ISM Manufacturing and regional Fed surveys point to continued losses in that sector.

Meanwhile, the slowdown in residential construction activity is finally starting to feed through into residential construction payrolls, which showed their fourth consecutive month of contraction just below cyclical highs.

Rising new home inventories mean that construction activity is likely to weaken further and could lead to accelerated job losses in this sector.

It's true that nonresidential construction payrolls continue to grow. But these tend to be less sensitive to the economic cycle, so aren't as meaningful an indicator for knowing if job losses will trigger recession.

Clients can see these key charts in our US Labor Market chart collection.